Buyer Willing to Pay More for Payless

SHARES OF PAYLESS SHOESOURCE HAVE had a run-up in recent months, but an investor seems to think that the discount footwear retailer is just hitting its stride.

Diaco Investments disclosed ownership of an 8.8% stake, or 5.7 million shares, in Payless on June 15, making it the company's second-largest shareholder after Goldman Sachs Asset Management, which owns 6.8 million shares, or a 10.4% stake.

Diaco is the investment vehicle of New York-based investor Simon Glick, the son of legendary jeweler Louis Glick. Simon Glick is likely best known for his backing of Morgan Stanley Real Estate Funds in the acquisition of the Canary Wharf complex in London.

In a phone interview, Simon Glick said that he started buying into
Payless
shares in August 2006 and that he built up his stake because "I like the business and I have a high regard for its management." According to Diaco's filing with the Securities and Exchange Commission, it broke through the 5% ownership mark on June 6.

Payless is the No. 1 shoe retailer in the Western Hemisphere, according to Hoovers.com, with stores in the U.S. and Puerto Rico, Canada, the Caribbean, and Central and South America.

The Topeka, Kan.-based company announced on Thursday that it has received federal antitrust clearance to acquire rival
Stride Rite
for $800 million. Payless will acquire Stride Rite's 300 stores, as well as its brands, including Keds and Tommy Hilfiger footwear.

Payless has announced it wants to boost its sales of branded footwear to 70% from 38% currently. The initiative to move away from low-priced, "no-name" footwear is part of the company's plan to reorganize itself into a holding company, Collective Brands Inc., which will operate brand development and licensing company Collective Licensing International in addition to the Payless and Stride Rite stores.

Investors so far have been upbeat on the company's plans -- Payless shares have climbed 24% over the past 12 months, compared to a 19% gain in the Dow Jones U.S. Apparel Retailers Index.

Simon Glick describes his investment style as "eclectic," and Diaco has made relatively few filings with the SEC. The firm's only other publicly disclosed holding is currently a 7.9% stake in
United Western Bancorp.

While Diaco filed as a passive investor in Payless, in the past, it has taken an activist stance at
Six Flags,
where Simon Glick backed fellow investor Daniel Snyder's successful attempt to gain control of the amusement-park operator's board. Now Diaco no longer owns shares in those two companies.

Diaco's decision to step into Payless shares "is a good signal in terms of at least one institutional investor having confidence in the Stride Rite acquisition" and the company's decision to turn toward higher-end, branded footwear, says Ben Silverman, director of research at InsiderScore.com.

Silverman cautions, however, that the limited information available on Diaco's investing style means that it is hard to gauge how Simon Glick may be planning to manage his Payless shares, or how long he plans to hold the stock.

Simon Glick is not alone in his enthusiasm for the company, however -- Goldman Sachs Asset Management disclosed on May 10 that it had raised its stake to 10.4%, or 6.8 million shares, from the 5.4% stake, or 3.5 million shares it disclosed on Feb. 6.

Analysts believe the stock is a shoo-in. Thomson Financial notes that the average rating is a Buy or the equivalent.

On May 31, analyst John Shanley of Susquehanna Financial Group reiterated a Positive rating. While Payless will face "short-term fashion and supply chain issues" in the second quarter, the acquisition of Stride Rite and restructuring "should bring significant synergistic benefits to Payless in terms of product development, sourcing and distribution efficiencies," Shanley wrote.

"We believe the company is fully capable of successfully integrating those components into what will likely become a major factor in the overall U.S. footwear marketplace," he added.

Recent Insider Activity

BUYERS:

COMPANY NAME

INSIDERS NAME

TITLE

$ VALUE

NO. OF SHARES IN TRANS.

RANGE OF VALUES

TRANSACTIONS DATES

Mobius Management Systems

J. Albracht

DO

$37,827,698

3,763,950

10.05

June 15, 2007

Cyberonics

H. Morrison

D

171,732

9,900

17.25-17.47

June 15, 2007

Church &amp; Dwight

M. Farrell

CFO

122,600

2,500

49.01-49.06

June 19, 2007

MVC Capital

W. Taylor

D

99,996

5,128

19.50

June 18, 2007

Dune Energy

S. Sisselman

D

60,344

25,000

2.40-2.42

June 18-19, 2007

Cadence Financial

J. Dowdle

D

57,750

3,000

19.25

June 19, 2007

Vita Food Products

D. Lipson

CB

33,791

20,100

1.66-1.69

June 19, 2007

BancInsurance

D. Borror

D

32,820

5,000

6.48-6.74

June 13, 2007

United Community Banks

A. Bennett

D

27,500

1,000

27.50

June 18, 2007

Evergreen Energy

R. Kaplan

D

24,160

4,000

6.04

June 20, 2007

(Source: Thomson Financial/Baseline)

SELLERS:

COMPANY NAME

INSIDERS NAME

TITLE

$ VALUE

NO. OF SHARES IN TRANS.

RANGE OF VALUES

TRANSACTIONS DATES

Toll Brothers

B. Toll

D

$31,104,001

1,160,000

26.52-26.85

June 18-19, 2007

Goldman Sachs Group

K. Kennedy

O

9,720,980

42,958

226.07-226.44

June 18, 2007

Illinois Tool Works

H. Smith

D

6,624,636

120,000

55.21

June 19, 2007

Abercrombie &amp; Fitch

M. Jeffries

CEO

5,281,204

68,100

77.42-77.71

June 18, 2007

Goldman Sachs Group

K. Kennedy

O

5,229,305

23,151

225.54-226.06

June 18, 2007

Franklin Resources

G. Johnson

CEO

5,169,546

38,600

133.75-134.10

May 25, 2007

Johnson Controls

G. Fiori

O

4,538,280

40,000

112.66-114.25

June 18-19, 2007

Cabot

K. Burnes

CEO

4,435,777

92,565

47.75-48.04

June 18, 2007

Perini

R. Tutor

CEO

4,358,391

70,600

61.50-62.01

June 19, 2007

Millipore

J. Rudin

O

3,850,001

50,000

77-77.01

June 19, 2007

(Source: Thomson Financial/Baseline)

Here's a rundown of insider trading activity reported on June 20, 2007. An insider is any officer, director or owner of 10% or more of a class of the company's securities. The table shows purchases and sales which must be reported to the SEC and other regulators by the 10th of the month following the month of the trade, includes both open-market and private transactions involving direct and indirect holdings. Excludes stock valued at less that $2 per share, acquisitions through options and companies being acquired. Included are purchases, sales and stock registered for sale for individual officers, companies, and sectors.

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